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Four Giant Tech Groups Keep the S&P 500 Aloft: Zacks August Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full August Market Strategy report To access the full PDF, click here


I. U.S. Markets

The S&P500 (SPY) share index --and the broader underlying U.S. economy-- is now tied directly to the success of just four major, converging, tech business groups.

Microsoft (MSFT), Apple (AAPL), Google/Alphabet (GOOG), and Amazon (AMZN) are the remaining four big titans. That spells MAGA. In the S&P500 market cap weighted index, the 4 companies made up a whopping 21% weight on April 20th, 2022.

They get put in different industry niches. Yet, if you read each Zacks analyst summary (which I have provided) they are converging to a similar tech conglomerate structure.

#1 Apple is 7.1%. It is in the TECHNOLOGY, CONSUMER ELECTRONICS industry.
#2 Microsoft is 6.0%. It is in TECHNOLOGY, SOFTWARE–INFRASTRUCTURE.
#3 Alphabet is 4.2%, with 2.2% in Class A and 2.0% in Class C. It is in COMMUNICATION SERVICES, INTERNET CONTENT and INFORMATION.
#4 Amazon is 3.7%. It is in CONSUMER CYCLICAL, INTERNET RETAIL.
 

Zacks Investment Research
Image Source: Zacks Investment Research

Microsoft’s share performance is benefiting from strength in its Azure cloud platform amid accelerated global digital transformation.
Teams’ user growth is gaining from continuation of remote work and mainstream adoption of hybrid/flexible work model.
• Recovery in advertising and job market boosted LinkedIn and Search revenues.
• Solid uptake of new Xbox consoles is aiding the gaming segment performance.
• The company is witnessing growth in user base of its different applications including Microsoft 365 suite, Dynamics and Power Platform.
• Microsoft expects Surface revenues to grow in the mid-teens range, driven by strong demand for premium devices.
• However, increasing spend on Azure enhancements amid stiff competition in the cloud space from Amazon is likely to dent margins.
 

Zacks Investment Research
Image Source: Zacks Investment Research

Apple shares are benefiting from continued momentum in Services and robust performance from iPhone, Mac, Wearables and an expanding App Store ecosystem.
• Apple expects COVID-induced supply chain disruptions and industry-wide silicon shortages to hurt the top line by $4-$8 billion.
• Unfavorable forex is also expected to hurt revenues by 300 bps.
• Absence of Russian revenues will hurt the top line by 150 bps.
• Nevertheless, availability of new Mac Studio and new iPad Air is expected to drive top-line growth.
Apple TV+ is gaining recognition due to award winning shows. This bodes well for the Services segment.

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Image Source: Zacks Investment Research

Alphabet's strong cloud division is aiding substantial revenue growth.
• Moreover, expanding data centers will continue to bolster its presence in the cloud space.
• Further, major updates in its search segment are enhancing the search results.
• Moreover, Google’s mobile search is gaining solid momentum.
• Also, strong focus on innovation of AI techniques and the home automation space should aid business growth in the long term.
• Further, its deepening focus on wearables category remains a tailwind.
• Furthermore, the company’s growing efforts to gain foothold in the healthcare industry are other positives.
• Also, Alphabet’s expanding presence in the autonomous driving space is contributing well.
• Notably, the stock has outperformed its industry over a year. However, its growing litigation issues and increasing expenses are concerns.

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Image Source: Zacks Investment Research

Amazon’s revenues were $469.8 billion in 2021.
• The company reports revenue under three broad heads—North America, International and Amazon Web Services (AWS), which generated 60%, 27% and 13% of total revenues.
• Amazon is gaining on solid Prime momentum owing to ultrafast delivery services and strong content portfolio.
• Further, strengthening relationship with third-party sellers is a positive.
• Also, growing momentum across Amazon Music is contributing well.
• Additionally, strong adoption rate of AWS is aiding the company’s cloud dominance.
• Also, expanding AWS services portfolio is continuously helping Amazon in gaining further momentum among the customers.
• Further, robust Alexa skills and expanding smart home products portfolio are positives.
• Additionally, the company’s strong global presence and solid momentum among the small and medium businesses remain tailwinds.
• However, growing expenses associated with supply-chain constraints and labor supply shortages remain concerns.

It is important to realize: Just four individual tickers really do keep the S&P500 afloat.

II. Zacks August Sector/Industry/Company Telescope

Incorporating half of Q2-22 earnings details, Zacks Ranks offer just one Very Attractive sector: Energy. But this sector may see declining future strength from $95 oil a barrel. However, higher U.S. Henry Hub natural gas prices assist. Energy/Oil stock profit-taking has happened.

Utilities stayed on as a Market Weight. Natural Gas Distribution is the best. Health Care and Communication Services are at Market Weight too. The Medical Care industry remains solid.

Both Consumer Staples and Consumer Discretionary rose a notch to Market Weight from Unattractive. Are we seeing an early top in the price surge? We shall see.

In Financials, Banks & Thrifts looked great. Overall sector looks shaky. Recession worries build.

Materials has become a Very Unattractive industry, with only Containers & Glass holding up.

Info Tech was a Very Unattractive sector. All key industries look poor, including Computer-Software Services, Office Equipment, Electronics, Misc. Tech, and Semis.

(1) Energy stays the top sector, rising back to Very Attractive from Attractive. Tops are Oil Misc. industries, the big Integrated plays, and Exploration & Production (E&P).

Top Zacks #1 Rank (STRONG BUY): Exxon Mobil (XOM - Free Report)

(2) Utilities stay a Market Weight. Utilities-Natural Gas Distribution is a very strong industry. 

Top Zacks #1 Rank (STRONG BUY): Cadence Design Systems (CDNS - Free Report)

(3) Health Care fell to Market Weight from Attractive. Medical Care carries on as best group.

Top Zacks #1 Rank (STRONG BUY): BioMarin Pharma (BMRN - Free Report)

(4) Communications Services
stays at Market Weight. Telco Equipment and Telco Services are sitting a touch below Market Weight.

(5) Consumer Discretionary rose to Market Weight from Unattractive. Autos/Tires/Trucks looked the best. Consumer Electronics was OK. Leisure Services fell to market weight. Home-Furnishing, Apparel, and Publishing look very poor now.

(6) Consumer Staples rose to Market Weight from Unattractive. Bullish outlier is Agri-business (commodity prices). Beverages look OK. A Very Poor stance for Food/Drug Retail.

(7) Financials remained at Unattractive. Banks & Thrifts stay the best. Investment Funds and Real Estate are OK. Other groups fall below that, as early 2023 recession worry builds.

(8) Industrials fall to Unattractive from Market Weight.  Transport is the top group. Pollution Control, and Business Services are OK. Aerospace, Machinery, Construction-Building Services, and Metal Fabricating took tumbles, and look poor now.

(9) Materials fall to Very Unattractive from Market Weight. Containers & Glass are OK.

(10) Info Tech falls to Very Unattractive from Unattractive. Computer-Software Services and Computer-Office Equipment are the best at a touch below Market Weight.

That’s it for me.

Enjoy the rest of Zacks August Market Strategy report.

Warm Regards,

John Blank

Zacks Chief Equity Strategist and Economist


In-Depth Zacks Research for the Tickers Above


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Exxon Mobil Corporation (XOM) - free report >>

BioMarin Pharmaceutical Inc. (BMRN) - free report >>

Cadence Design Systems, Inc. (CDNS) - free report >>